Reliance discovers too much gas can be bad for profits

Vol 10, PW 24 (05 Apr 07) Midstream & Downstream

Too much of a good thing can also be bad.

Reliance is discovering this as it makes more and more gas discoveries in the eastern offshore, not only at D-6, but also at NEC-25 in the shallow waters offshore Orissa. “Once D-6 production reaches peak levels it will meet India’s gas demand,â€‌ says a source.

“India will be gas-surplus with peak production from D-6.â€‌ Around 80m cm/d of locally produced gas (from GAIL, Cairn, Niko, BG etc) is already available to customers in India today, but demand is easily double.

Reliance will fill that gap when it begins producing from D-6 at a peak rate of 80m cm/d from just two discoveries by the end of next year: Dhirubhai 1 and Dhirubhai 3. First production is slated for June 2008.

This is where Reliance faces a problem of plenty. “Gas will be surplus but not so much as to justify exports,â€‌ says a source.

“Setting up a gas liquefaction facility for export will cost about $5bn and needs massive gas reserves that Reliance does not have.â€‌ What Reliance does have is enough gas from D-6 to meet domestic demand and have some surplus left over.

Where does that leave gas supplies from Reliance’s other discovery block: NEC-25 “Producing from NEC-25 when so much gas is available from D-6 will be like flooding the market,â€‌ adds a source. “Reliance might not want to do that.

â€‌ Reliance has made six discoveries on NEC-25 and put together, total proven and probable categories of reserves add up to 5-tcf. “These are very small discoveries compared to D-6,â€‌ we hear.

“Gas volumes from NEC-25 will be small so the per unit cost of production will be more than D-6.â€‌ Couple this with lack of demand from backward Orissa, the state nearest the discovery, and it’s not difficult to see why Reliance signed a MoU with West Bengal to transport NEC-25 gas to Haldia and the state’s industrial hinterland.

But will it find any buyers In short: don’t be surprised if Reliance delays NEC-25 gas production.